Value a business for crowdfunding Value a business for crowdfunding Value a business for crowdfunding Value a business for crowdfunding
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Value a business for crowdfunding

How to value a business at an early stage for investment such as crowdfunding

R A Valuation Services Limited specialises in providing sensibly and competitively priced formal business valuation and company valuation reports for businesses and other organisations in the UK and Europe. R A Valuation Services has expertise and, all importantly, suitable comparable data to accurately assess the value of a business or company in its early stages, such as for crowdfunding and similar or related investments. Below, we outline the uncertainties to valuation at these stages typically incurred by traditional valuation methods.

Valuing an early-stage business is notoriously difficult. Unfortunately, there may not be a set formula or valuation method that is universally applicable for valuing companies at this stage for investors and entrepreneurs to lean on.

Traditional valuation methods can prescribe formulas based on a company's past performance to give an indication of the company's expected future performance. For a later-stage company this may work, but for an early-stage business that has little to no track record, whose future financial performance and cash flows are uncertain, has a high growth rate and whose terminal value is a long way in the future, these methods are difficult, if not impossible, to apply. This is why valuing an early stage company is often considered to be more of an art than a science.

The valuation of an early-stage company will be determined by a combination of factors, some of which are explored in this post.

The main purpose of setting the valuation is to calculate what an investor needs to pay to own a percentage of the company today. There are two valuation numbers a company should be aware of; the pre-money and post-money valuation. These can be confusing but they make a big difference as to how much of your company you are looking to sell in your next investment round.

Pre-money valuation = the value of the company now, before you accept your upcoming investment

Post-money valuation = the value of the company after you accept your upcoming investment

Below are examples for calculating valuation:

If the business needed to raise, say, 100,000 and believed that they should be valued at a 1,000,000 pre-money valuation (1.1 million post-money) then the business would need to offer 9.09% equity in their next round. i.e. (100k/1.1m) x 100 = 9.09%.

Contrastingly, if the business raised 100,000 at a 1,000,000 post-money valuation (900k pre-money) they would have needed to sell 10% of their shares. i.e. (100k/1m) x 100 = 10%.

Understanding the difference between the pre-money and post-money valuation is fundamental to any investment deal. The valuation of an early stage company will be determined by a combination of factors. Equity crowdfunding is a marketplace, like any other, and, therefore, the biggest determinate of the valuation of a company will be investor demand to get in on the deal.

If you are interested in getting a professional formal valuation, please contact us to discuss your requirements.

Business Valuations
Can RA value any type of Business?
The valuation process can be applied to all types of small business provided that the business has a suitable trading history .... more >>

How does RA value a Business?
The valuation process is concerned, primarily, with an assessment of a justifiable value for goodwill .... more >>

What is R A Valuation Services Ltd?
Established in 1991, RA specialises solely in business valuation .... more >>

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